Down the Road to Serfdom

by Ann Berg

Threatening an imminent economic collapse, Treasury
Secretary Hank Paulson and Fed Chairman Ben Bernanke have bamboozled Congress
into enacting the most brazen confiscatory scheme ever concocted by government.
The scheme would have American taxpayers fork over $700 billion of their cash
to help recapitalize some of the country's biggest banks – the same banks that
recently larded their bigwigs with $62
billion in bonuses.

Sensing a pushback by the world's dollar-surplus regions – Asia and the Mideast
– to finance the largest debtor economy, the U.S. government will now plunder
its own countrymen to keep capital
running "uphill." As with most statist remedies, it is being
marketed as a boon for Main Street, tantalizing its inhabitants with the prospect
of profits wafting westward from those malodorous Wall Street investments.
However, Congress has inured the Treasury from accountability and legal recourse,
giving Paulson dictatorial power over the nation's financial sector. Rather
than let this bloated
segment of the economy shrink and consolidate, Paulson and his successor
will extend it unlimited life support, bloodletting everything else, in a final
ruin of the nation.

The problem that is vexing the financial system, we are told, is the pile
of mortgage-backed securities held by financial institutions. These have lost
value as the underlying assets – the actual homes – have plummeted in value.
But this is a fraud. This precipitating event no more caused the financial
fiasco than the murder of someone named Ferdinand provoked World War I, as
taught in elementary school.

Remember the war? Not just the current and future wars, but the one that gave
us the fiat monetary system: the war in Vietnam. Prior to that calamity the
world operated under the Bretton Woods monetary system, a post-World War II
arrangement that pegged all currencies to the dollar and made only the dollar
convertible to gold, thereby ensuring the dollar's reserve currency status.
During the 1950s, the system seemed invulnerable as U.S. gold reserves exceeded
foreign liabilities by threefold. By 1970, however, as the U.S. inflated its
money supply to fund the Southeast Asian conflict, the monetary position of
the U.S. reversed, with foreign liabilities exceeding gold reserves fivefold.
When France demanded gold for dollars at the statutory rate of $35/oz., President
Nixon shut the gold window for good. As a result, currencies went from a fixed
to a floating (and pegged) rate system in 1973. It has vexed economists ever
since.

This system of fiat currencies has given peculiar leverage to the U.S. dollar.
As the world's reserve currency, the dollar has preserved faith in its purchasing
power among its holders, including foreign central banks. This faith and willingness
to buy U.S. low-yield debt instruments such as Treasuries has enabled the U.S.
public and private sectors to go on the largest borrowing binge the world has
ever seen, manifesting in the gargantuan twin deficits of budget and trade.
These imbalances would never have occurred under a gold standard. Credit would
have been constrained by statutory levels of gold reserves in the banking system,
instead of being created out of thin air by the 40-1 leverage levels granted
by the SEC
in 2004 to the five now defunct investment
banks. Also, the huge influx of imported goods would have halted due to
inflationary pressures in the exporting countries – a phenomenon deemed the
"price-specie
flow mechanism" by 18th century philosopher David Hume.

Robert Mundell, a Nobel Prize-winning economist who sparred with Milton Friedman
over floating rates vs. the gold standard, had this
to say about fiat currencies:

"The present international monetary system neither manages the interdependence
of currencies nor stabilizes prices. Instead of relying on the equilibrium
produced by [gold's] automaticity, the superpower has to resort to 'bashing'
its trading partners, which it treats as enemies."

So here we are: a phony monetary system, $3
trillion wasted on wars, and a citizenry mired in debt. And what does Congress
do? It adds more debt – a trillion dollars, just for starters, since once starting
down this slippery slope, it won't be able to stop. It then gives the Treasury
the green light to buy securities that are trading as low as 20 cents on the
dollar at the hold-to-maturity value, i.e., par! Not surprisingly it has engaged
in a media blitz to "sell" this boondoggle, convincing the taxpayer
that this bucket of dross will one day turn to platinum. Sensing that working
stiffs are a little perturbed about the fleecing, it has leapt to the offense:
"No, this is not a bailout of Wall Street. This is a rescue plan
for Main Street." By embracing the mortgage waste dump, U.S. citizens
are supposedly saving jobs and retirement dreams. They are told that interest-free
car loans will stream from dealerships and refi windows will again beckon,
even to those with homes worth half the value of mortgage paper.

With Congress granting the Treasury (along with an "oversight" board)
almost unlimited
power over the country's financial landscape, the U.S. has terminated its
democracy and is well on the Road
toSerfdom. As Friedrich Hayek explained in 1944, "Economic
control is not merely control of a sector of human life that can be separated
from the rest; it is the control of the means for all our ends. And whoever
has sole control of the means must also determine which ends are to be served,
which values are to be rated higher and which lower – in short, what men should
believe and strive for."

Ann Berg
has spent a 30-year career in commodities and capital markets
as a trader, consultant, and writer. While a commodity futures
trader and Director of the Chicago Board of Trade, she advised
foreign governments, NGOs (the United Nations, World Bank),
think tanks (Catalyst Institute), and multinational and foreign
corporations on a variety market-related issues. She was also
a frequent conference speaker at international derivatives markets
forums. In recent years, she has contributed articles to several
commodities/capital markets publications, including Futures
Magazine, Traders Source, Financial Exchange,
and the Financial Times editorial page. Berg is also
an artist. She is currently working on a body of work entitled
The Unknown Unknowns  The Things You Dont Know
You Dont Know, which explores U.S. national security
policy.

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